Portfolio choice with jumps: A closed-form solution

Details Portfolio choice with jumps: A closed-form solution Portfolio choice with jumps: A closed-form solution

2009-06-12

arxiv.org/abs/0906.2324v1

Annals of Applied Probability 2009, Vol. 19, No. 2, 556-584

Mathematics

Probability

Published in at http://dx.doi.org/10.1214/08-AAP552 the Annals of Applied Probability (http://www.imstat.org/aap/) by the Inst

Scientific paper

10.1214/08-AAP552

We analyze the consumption-portfolio selection problem of an investor facing both Brownian and jump risks. We bring new tools, in the form of orthogonal decompositions, to bear on the problem in order to determine the optimal portfolio in closed form. We show that the optimal policy is for the investor to focus on controlling his exposure to the jump risk, while exploiting differences in the Brownian risk of the asset returns that lies in the orthogonal space.

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